Paragraph 1: Anticipating a Market Shift in 2025
The year 2024 witnessed a remarkable surge in mega-cap tech growth stocks, driving significant gains in major market indices. However, Neil Hennessy, chairman and chief market strategist of Hennessy Funds, predicts a shift in market dynamics in 2025. He anticipates a transition from growth stocks to value investing, with a particular emphasis on small- and mid-cap stocks. This prediction stems from the belief that the current valuations of large-cap tech stocks are unsustainable, creating potential volatility in the market. Hennessy suggests that investors should prepare for a "roller coaster ride" in the coming year, as the market adjusts to changing conditions.
Paragraph 2: The Allure of Mid-Cap Stocks
Hennessy’s focus on mid-cap stocks is rooted in their perceived undervaluation and growth potential. Mid-cap companies, with market capitalizations between $1 billion and $10 billion, currently trade at about 18 times forward earnings, compared to higher valuations for large-cap stocks. This relative undervaluation presents an attractive investment opportunity. Mid-cap companies also offer diversification benefits, often operating across multiple business lines, and possess greater agility compared to their larger counterparts. This flexibility allows them to adapt more readily to changing market conditions. Furthermore, mid-caps offer a balance of performance potential and lower volatility compared to small-cap stocks, making them a compelling option for investors seeking a blend of growth and stability. Historically, mid-caps have outperformed large-caps over the long term, and Hennessy believes they could experience a surge as large-cap stocks face increased volatility.
Paragraph 3: Economic and Market Outlook
Hennessy Funds anticipates a stable economic environment in the near term, with inflation remaining under control and interest rates holding steady. This scenario is expected to neither significantly benefit nor hinder businesses or consumers. Consumer spending, a key driver of economic growth, is projected to remain robust despite expectations of a slower holiday shopping season. Factors supporting this resilience include low unemployment rates, strong job openings, and healthy corporate profits and cash flows. Hennessy notes the absence of widespread market euphoria, except in specific areas like AI and cryptocurrencies, emphasizing the importance of diversification and strategic stock selection. He views U.S. equities as offering moderate risk-reward potential due to positive earnings prospects and substantial corporate cash reserves available for stock buybacks and dividends.
Paragraph 4: Abundant Cash Reserves and Sector Rotation
A significant amount of cash remains on the sidelines, poised to enter the market under the right conditions. S&P 500 companies hold substantial cash reserves on their balance sheets, alongside significant funds in money market accounts and record-high bank deposits. This abundance of liquidity suggests potential for future investment activity. Hennessy anticipates sector rotation towards more defensive sectors, such as consumer discretionary, industrials, and utilities, if growth stocks lose momentum. He also expects financial stocks to perform well, fueled by improving interest rates and a healthy banking system. This shift in sector allocation reflects a potential move towards stability and income-generating investments in a changing market environment.
Paragraph 5: Highlighting Mid-Cap Success: The Cornerstone Mid Cap 30 Fund
Hennessy highlights the performance of the Hennessy Cornerstone Mid Cap 30 Fund (HFMDX) as a prime example of the potential of mid-cap investing. The fund has delivered impressive returns, significantly outperforming the S&P 500 over various timeframes. This success is attributed to the fund’s concentrated portfolio of 30 mid-cap stocks, selected based on a combined strategy of value investing, earnings momentum, and stock momentum. The fund’s focus on consumer discretionary and industrial stocks, sectors expected to benefit from economic stability, has contributed to its strong performance. Furthermore, the fund’s lower valuation compared to the overall market, as indicated by its price-to-sales and forward P/E ratios, suggests further upside potential.
Paragraph 6: Recognition and Investment Strategy
The Hennessy Cornerstone Mid Cap 30 Fund has received industry recognition for its consistent outperformance, including the 2024 Refinitiv Lipper Fund Award for Best-in-Category performance over a five-year period. This award underscores the fund’s ability to deliver superior returns compared to a large peer group. The fund’s active management approach and concentrated portfolio construction, focusing on undervalued mid-cap companies with strong earnings and momentum characteristics, have proven highly effective. With a reasonable expense ratio, the fund offers investors a compelling opportunity to participate in the potential growth of mid-cap stocks while diversifying away from the concentrated risks associated with mega-cap tech investments.
